Difficult times for Grain Traders

by Chris Lyddon
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The world is going to need more grain, and it must find more land for planting and new ways to increase yield. This must be done against a background of macroeconomic problems in the wider economy, political uncertainty and, as ever, the weather, said Dan Basse, president of Chicago, Illinois, U.S.-based Agresource, at the 2011 Global Grain Conference in Geneva, Switzerland on Nov. 16.

“We’re at a crossroads,” he said. “We don’t have any confidence in our political leadership. We have slowing world economies. For all of you, at least for the next few months, it will be difficult to be grain traders. One day you’re up, the next day you’re down.”

He explained that normal weather could mean further growth in grain stocks, and he did not come down in favor of or against any one section of the grain market.

“I like corn better than wheat,” he said. “I think vegetable oils will be a bull market in 2012, but it’s hard for me as an analyst to really put my teeth into something and say like last year: ‘You’ve just got to buy corn.’

“We don’t make up the numbers. The markets are what they are. As we go forward to the year ahead, I know there’s going to be tremendous trading opportunities, and we are still in this kind of category where it’s not how much money you make, it’s how much money you keep,” he said. “How many grain traders made lots of money last year only to give it back? There will be opportunities. I don’t think you need to fall in love with anything today.”

Outside problems make the markets more difficult.

“These are tough markets,” he said. “They are tough not only from the standpoint of grain fundamentals. They are tough because we are sitting here trying to decipher whether Greece will remain in the (European) Union? Will French banks survive? Will the United States be able to cut its deficit? These markets are tough for macro purposes.

“When I started to prepare this presentation in August, we were happy that markets were performing properly. Why? Because our politicians were on holiday. I hated it when they came back in September.”

The year of corn

Last year, at the same conference, Basse called it the year of corn.

“It performed very nicely,” he said. “We now have wheat prices back to where we were two years ago in January of 2009. We have corn and soybean prices that are still higher.”

He looked at a chart of the prices of all three commodities.

“If we go back to 2008, you can see how global grain prices were somewhat pinned together and all of a sudden our friends in China started to see prices appreciating, and now here today we have these wide spreads,” he said. “We’ve got this triple level of price. China being the highest, the U.S. caught in between, and the Black Sea being the low-cost seller. We all know what the driver of the agricultural bull market has been for the last few years: rising caloric intake in Southeast Asia and biofuels.”

He described a crisis in confidence. “Yesterday in Chicago, grain prices were up sharply,” he said. “This morning in Chicago, grain prices are down sharply. It’s just another day. Every day we wake up not knowing what time bomb is going to be ticking in the minds of the politicians, in the minds of the market, in the economy. Unfortunately, that is driving price direction.”

He looked at where the markets stand historically. “Today, the price of corn is at a record high for the month of November,” he said. “We still think it is the leader. It will hold better than the rest. It doesn’t make us bullish.

Basse said global grain demand in 2012 is forecast to increase by about 3% or 40 million tonnes.

“As we look at livestock, we’re still seeing the same recovery so we still believe we are in a structural bull market. It’s just that lack of confidence and the 73 million tonnes of grain that has given us some pause, at least at current price levels.

“For the year ahead, Agresource is predicting that the world will produce about 43 million tonnes extra of grain, and that will put us at 1.843 billion tonnes of grain as we look forward. That’s a new record high.”

He noted that grain production was having trouble expanding. “As we look at global grain stocks, they are rather flat,” he said. “So we have high prices.”

There is a problem finding the new acreage that is needed. “We in the United States have pretty much maximized our planted area outside a program called Conservation Reserve Program,” he said. “In the E.U., you have done the same. Australia’s planting about as much acreage as it can. If we get these extra acres, they have got to come from places like South America or our friends in Russia, the Black Sea, Kazakhstan and Ukraine. Those are acres that are harder to pull in.

“Just a few weeks ago we hit 7 billion people on this planet. By 2040, it will be 9 billion people. As we look at the amount of hectarage per person in the world, we can see that is still in decline. We reached a record low this year of .09 hectares per person. Each one of you, and everybody in agriculture, has got the chore of having to produce more grain. The only way we can do that is without farmers producing more yield. That’s the only way that happens.”

If the trend yield doesn’t rise, global grain and oilseeds stocks will fall below the critical 50-kilogram-per-capita level, Basse said.

“We are not there today, but we are not moving in the right direction. Even with the abundance of grain this year, the extra 73 million tonnes, we still saw per capita supplies of grains and oilseeds decline.”

The U.S. is becoming less important as an exporter with its share of world grain trade down to a record-low 32% this year.

“I should have brought a video of barge traffic on the Mississippi River. I just couldn’t find any barges,” he said. “The U.S. has fallen out and has now become the world’s residual supplier of grain. Exporters in other parts of the world, namely the Black Sea, have taken over their dominance.”

The return of the Black Sea has been the biggest change in the market, he said. “Our friends in the FSU-12 have recaptured their export crown in terms of being the world’s largest exporter,” he said. “What did the Russians do? They basically gave us a big crop at a cheap price and they bought their way back in terms of being a reliable supplier. That is why the wheat markets starting after July had a price fall.

“For the first time on record, our friends in South America and the former Soviet Union will export more corn than the U.S. and E.U. combined,” he said. “It’s never happened before. This shows you the change in the global landscape that is occurring. The U.S. used to be the dominant force in terms of corn trade.”

He also took a look at prices adjusted for inflation. “You can see that prices are still historically low at these levels,” he said. “If there is a weather problem in Latin America or the world, you could see grain prices substantially higher. That’s the risk that you run.”

Concern over corn yields

He expressed concern that BT corn is starting to lose the battle against insect pressure.

“The problem is that this year we saw that the worms were winning,” he said. “They weren’t dying. We think Mother Nature has been able to adapt to GMOs in a matter of 10 or 12 years versus the 40 to 50 years that the scientists predicted.

“We worry a little bit that even though the world needs more corn, GMO might not provide that yield kicker that we were all hoping for,” he said. “We have farm clients that seed companies are writing checks to because the seed did not perform to its billing and more importantly those seed companies are prepared to give them insecticide revenue, write them a check for insecticide, because they’re concerned that the worms are going to get them,” he said. “Mother Nature is very adaptive and very quick to learn, so she has been able to combat some of our technology, if you will.”

Consistency has been improved by GMO strains since 1997, he said, but nevertheless this is the second year in a row that corn has fallen below the trend line.

“We need GMO crops in the United States to perform better, otherwise stocks-to-use ratios in the United States will decline,” Basse said.

He closed his presentation by noting that the issues affecting the global economy will have a profound impact on the grain markets in the coming year.

“GDP this year is forecast by the IMF to reach somewhere between 3.6% and 3.9% for 2012,” he said, noting that Southeast Asia was leading growth. “We in the developed world of the United States and Europe are still struggling. Until we get these debt issues resolved, there is going to be uncertainty in the market. It takes government leadership and confidence for me to buy Italian debt today. Maybe the ECB can do it.”

He pointed out that China, like the U.S., has an aging population. “It’s getting to a point, as we go forward, that caloric consumption, at least in the United States, is going to stall out,” he said.